Disallowance U/S 40A(3) - whether persons to whom payments were made were made at places where your assessee had no bank account and in the course of transport business, the provision of section 40A(3) disallowance is not warranted? - Held that:- The assessee had incurred the expenditure during transportation and logistics, in that process the drivers and staff incurred these expenses en-route to the destination like diesel, repairs, toll charges etc. One has to verify each payment and sub-payme .....

ny one person on a day, only these payments alone should be disallowed. We find it appropriate to remit the issue back to the file of the AO to determine the payment above ₹ 20,000/- to any person as per section 40A(3) of the Act and make the disallowance accordingly. Ground Nos. 1 & 2 are treated as allowed for statistical purposes.
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Addition being notional interest - AO has charged notional interest @ 14% on the advances given to group companies, directors and relatives considering .....

ercial expediency. With regard to advances to directors/relatives, we do not have details for which purpose they were given. Still, we do not see any reason to charge notional interest on the advances, when there is no cost to the company, in case the advances were paid utilizing the IGF investments. Thus we are inclined to treat the advances given to group concerns, is on commercial expediency and loan to directors as allowable as the company has enough reserves in the business to finance the s .....

involved and volume of the transactions, we agree with the CIT(A) that 7% of the expenses may be disallowed. The CIT(A) has considered the total expenditure (cheque & cash), in our considered view, we restrict the disallowance to cash expenses alone. Hence, AO is directed to disallow the cash expenses to the extent of 7%. Thus, Ground Nos. 7 & 8 are partly allowed. - ITA Nos. 1648/Hyd/2013 - Dated:- 18-1-2017 - SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For .....

transport business, the provision of section 40A(3) disallowance is not warranted. 2. Your Assessee submits the CIT(A) estimated ₹ 70,00,000/- as disallowance U/S 40A(3) without considering the nature of business and circumstance under which the expenditure is incurred, which is on high side. 3. Your Assessee submits that the CIT(A) ought to have deleted the addition of ₹ 5,84,04,127/- being the difference in the closing stock for year and previous year without finding any defects in .....

sessing Officer ignoring the fact that there was no diversion of borrowed funds, your Assessees prays for deletion of the same. 6. The CIT(A) as well as the Assessing Officer erred in law and facts of the case in charging notional interest on assumption and presumption that funds have been diverted without giving any findings, ignoring the fact that the investment had been made in the previous year and no disallowance was made in the previous years, your assessee prays that the addition may be d .....

ce of percentage expenditure may be reduced to less than 7% on the amount actually paid in cash amounting to ₹ 38,03,15,350/-. 2. At the time of hearing, the ld. AR of the assessee submitted that ground Nos. 3 & 4 are not pressed by the assessee, hence, the same are dismissed as not pressed. The other grounds are being disposed of as under: 3. As regards ground Nos. 1 & 2 regarding disallowance u/s 40A(3) amounting to ₹ 70,00,000/- is concerned, on verification of cash book, .....

al before the CIT(A), it was submitted that the Assessing Officer ought to have appreciated the fact that these are not single payments and under different heads. Majority of these expenses were incurred by the drivers or staff of the company and most of these expenses are incurred en-route during the transport. Further, it was submitted that the nature of expenses would be purchase of diesel, repairs, payment of toll gate and others and these expenses were incurred outside the head office or re .....

, consultancy charges, legal expenses, local lorry hire charges, office godown maintenance, packing expenses, packing material expenses, vehicle maintenance etc. He noted that as per the details submitted, some of the entries in excess of ₹ 20,000/- include several expenses of small amounts incurred en-route by the drivers, cleaners etc. for diesel, tollgate, etc., and all such expenses were clubbed and one entry was passed for each trip. The 40A(3) disallowances made for the last three ye .....

/s.40A(3) as against the disallowance made by the AO at ₹ 1,88,95,204/-. 6. Aggrieved by the order of CIT(A), the assessee is in appeal before us. 7. Ld. AR submitted that the AO has not doubted the genuineness of the expenditure. The expenses were incurred for the purpose of business and the assessee is in transport and logistic business, it necessarily has to incur the expenditures in cash. The drivers and staff had to incur the expenses like travelling conveyance, toll charges, sundry r .....

rving as on verification of cash book, it is observed that payments were made on numerous occasions by the assessee wherein the said amounts exceed ₹ 20,000/-. From the above, it is clear that AO has disallowed just because the payments were more than ₹ 20,000/-. As per section 40A(3), where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque, exceeds twenty thousand rupees. In .....

y the law of percentage in the case of disallowances. It has to be actual. Hence, in our view, the details of expenditure could be verified and the payment of above ₹ 20,000/- should be verified. In case, it is found that the payment of above ₹ 20,000/- to any one person on a day, only these payments alone should be disallowed. We find it appropriate to remit the issue back to the file of the AO to determine the payment above ₹ 20,000/- to any person as per section 40A(3) of th .....

allotted subsequently. From the balance sheet, it is seen that 'Advances' of ₹ 8,86,92,075/- was made to group companies, directors and relatives. The AO was, therefore, of the view that the funds were diverted in the form of interest free advances to group companies, directors and their relatives. Accordingly, the AO computed the notional interest @ 14% and the same was put forth to the assessee s AR, to which the AR vide letter dated 05/12/2011 agreed and submitted calculation o .....

iverted as interest free loans to the sister concerns. It was submitted that there is no dispute to the fact that an amount of ₹ 65 crores was invested by India Growth Fund (IGF) in the company and these funds do not bear any interest. The equity shares in the company have been allotted to IGF. Under these circumstances, the AR of the assessee submitted that the Assessing Officer is not correct in estimating notional interest and the same has to be deleted. 12. After considering the submis .....

3,87,029/- Rs.8,60,98,856/ No interest is charged on the advances made to group companies/ directors/relatives. However, the assessee had paid interest on term loans / bank charges of ₹ 6,51,70,945/-. 12.1 In view of the above factual background, the CIT(A) confirmed the action of the AO by observing as under: 10.4 The fundamental issue is whether these loans to group companies/directors/relatives were given for the purpose of business or otherwise is not brought on record. The assessee ha .....

round of appeal is dismissed. 13. Ld. AR submitted that during the year, India Growth Fund (IGF) has invested ₹ 65 crores for the purpose of investment in shares, the assessee has subsequently issued shares. These funds do not carry any interest. Hence, there is no cost to the company. The assessee has invested the funds in the group companies on commercial expediency. The AO cannot charge notional interest when there is no cost to the assessee. 14. Ld. DR relied on the orders of AO and CI .....

that the assessee has incurred financial charges to the tune of ₹ 6.51 crores during the year. These financial charges are towards interest on term loan and other interest charges. We observe from the Balance Sheet that the term loans, working capital loans and vehicle loans ere existing loans (balance carried from previous year). There is no fresh loan taken this year, which the assessee would have diverted during this year. We also observe that the assessee has considerable reserves in t .....

rt in the case of Hero Cycles (P) ltd., [2005] 63 Taxmann.com 308 (SC), which is as under: In the process, the Court also agreed that the view taken by the Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd.' [2002 (254) ITR 377] wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm .....

ing the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses. It would also be significant to mention at this stage that, subsequently, the assessee company had off-loa .....

ank account when the said advance of ₹ 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilize those funds for giving advance to its Directors. On the basis of aforesaid discussion, the present appeal is allowed, thereby setting aside the order of the High Court and restoring that of the Income Tax Appellate Tribunal. Following the above rati .....

d to P&L A/c. under Schedule 14,15 & 16. However, it could produce the bills only for ₹ 53,03,75,370/-. He could not produce the bills for the balance amount of ₹ 1,74,92,54,028/-. b) That the accounts of the assessee were not audited. c) That several opportunities were given to the assessee to produce the bills/invoices. d) Accordingly, 10% of the expenses for which movables were produced were disallowed by the AO. 17. On appeal, before the CIT(A) the assessee submitted that .....

80,77,90,922 38,03,15,350 227,96,29,398 Referring to the above table, the CIT(A) observed that out of the total expenses incurred by the assessee of ₹ 2,27,96,29,398/-, the TDS was deducted on ₹ 1,09,15,23,126/-, cheque payment s were made of ₹ 80,77,90,922/-. The cash payments were to the tune of ₹ 38,03,15,350/-. Keeping in view the nature of business of the assessee and also the fact that the accounts were not audited and also that certain disallowances u/s 40A(3) wer .....